Taxes for Thee, but Not for Me

The news about sales taxes for online retailers, such as Amazon, has usually been about how states were struggling, largely unsuccessfully, to pull that e-business into the sales tax net. But in a new twist, Amazon is holding out a carrot to New Jersey: If the state foregoes, at least temporarily, the right to collect sales taxes on residents, Amazon will create 1,500 jobs by building distribution centers in the state.

Meanwhile, other states, such as Arizona, are pushing to eliminate an ineffective and unenforced law requiring the state’s residents to report and pay sales taxes on their online purchases.

Under a 1992 Supreme Court ruling, online retailers do not have to collect state sales taxes unless they have a physical presence in a state. So, with Amazon considering opening distribution facilities in New Jersey, it would trigger the requirement to collect sales taxes on online sales to residents. Amazon is working to cut a work-around deal to delay any tax collection until next summer in return for creating those 1,500 jobs and investing $130 million.

While consumers love the idea of lower priced goods, bricks-and-mortar retailers, naturally, object to any special treatment for their online competitors. The 4% to 9% in foregone sales taxes can give the online retailers a significant price advantage when they also offer free shipping. The ranks of the bricks-and-mortar retailers are often joined by state and city officials across the U.S., who are still hurting from lower sales tax receipts because of the poor economy and other factors. Last year, sales tax collections, which have been near historic lows, increased by only 1.2%, despite a 4.7% rise in consumer spending. Those local officials often have close ties to the local merchants, who already pay property and income taxes to the states, and thus the two groups should make natural allies against exemptions for online sellers.

Yet, the general anti-tax sentiment sweeping much of the country appears to trump all of that for now, to the advantage of the online retailers. In Arizona, for instance, state legislators are pushing to do away with a state law requiring consumers to pay state sales taxes on all annual online purchases when they file their state income tax returns. As it is, practically everyone ignores the law.

The anti-tax sentiment also appears to overwhelm the fact that the tax advantages allowed for online retailers means bricks-and-mortar retailers are less likely to expand or hire more workers. Some will even be put out of business.

“Of course Amazon destroys more small business sales jobs than the number of warehouse and shipping jobs it creates,” says Wharton’s Eric Clemons, a professor of operations and information management. “That’s what economies of scale and operational efficiencies do.” The real question is whether or not online businesses should be exempt from sales taxes at all, he adds.

Sponsored Content:

According to Clemons, “We really need to decide: (1) that online giants like Amazon need to be subject to sales tax regardless of where they are headquartered and regardless of where they have commercial facilities; or, (2) sales tax needs to be eliminated. It’s not a decision about whether sales taxes are still necessary revenue sources, but rather whether they are still feasible revenue sources. Anything that systematically places small local businesses at a competitive disadvantage is probably no longer part of a rational fiscal policy.”

Wharton management professor Stephen J. Kobrin points out two conceptually separate issues: “First, N.J. Is using tax relief to attract an investment and presumably the jobs that come with it. That is standard practice among states and municipalities, although this is quite different as it is not an income tax abatement on a specific facility located in the state. Furthermore, incentives whether they take the form of tax relief or infrastructure (new roads or facilities), usually provide a competitive advantage to the firm that receives them.”

At the same time, this case is very different. “There is a fundamental principle in play here: Whether on-line retailers should be subject to sales tax in a given state, whether or not they have physical facilities in that state,” Kobrin says. “I believe that the clear answer is ‘yes.’ There is absolutely no reason that they should pay sales tax and not doing so provides an unfair competitive advantage. So, Amazon is not merely seeking an incentive to locate in N.J., but basically is arguing that their sales should not be taxed as a matter of principle. In this case, I suspect the fact that they are building a distribution center is a convenient fig leaf which allows N.J. To back away from taxing Amazon without appearing to give on the underlying principle.”